Morningstar Equities Research

Fletcher Building Limited FBU, FBU-NZ|
Earnings Growth on Track for Fletcher
Building

Morningstar Recommendation:
ReduceTim Mann, Morningstar Analyst - Fletcher Building provided a
strategic overview of the business at a recent investment
conference. The company reiterated its focus on value
creation through margin improvement, disciplined capital
allocation, and active portfolio management. We have left
our earnings estimates unchanged and fair value estimate
remains at AUD 5.50 per share. We maintain our no-moat and
high uncertainty ratings.

We note EBIT guidance for 2014
remains unchanged at NZD 610 million to NZD 650 million. We
continue to believe Fletcher's leading brands and market
positions leave it well positioned to benefit from the large
pipeline of rebuild work in New Zealand and an expected
improvement in activity in Australia. However, fierce
competition, low barriers to entry, and largely commoditised
products will continue to hamper the company's ability to
build sustainable competitive advantages and generate excess
returns. While Fletcher may be the large local player, price
increases are kept in check by global players.

For New
Zealand, the level of house building activity is expected to
continue to underpin trading results. The repair of houses
and infrastructure in Canterbury will boost activity levels.
In Australia, the outlook remains uncertain with the mix of
stand-alone versus multi-residential housing construction
impacting demand, with apartments continuing to grow
strongly (60% of new housing starts). Declining investment
in mining and resources and reduced state government
expenditure is likely to adversely impact activity
levels.

Morningstar Recommendation:
HoldDavid Ellis, Morningstar Analyst - Wide-moat rated Westpac Banking
Corporation continues to build momentum across key
businesses with lending and deposit volumes up on the back
of stronger economic conditions, particularly in its home
state of New South Wales. Westpac maintains the top-ranked
investment platform based on fund flows, and consumer
customer satisfaction remains high at about 79%. Strong
competitive advantages, an Exemplary rating on stewardship
of shareholder capital and our medium fair value uncertainty
rating underpin our positive investment view. Westpac
operates the lowest balance sheet leverage of peers with
assets to equity of 15 times and the highest common equity
tier-1 capital ratio of 8.8%. Tight operational control is a
feature, with Westpac's globally competitive 41%
cost-to-income ratio best of peers, complementing its
top-ranked risk management position.

We are increasingly
confident in our earnings and dividend forecasts for fiscal
2014 and 2015. Westpac's large exposure to the more heavily
populated and economically stronger eastern states means a
sharp deterioration in profits is very unlikely for the next
18 months at least. Our positive view translates to
attractive growth in the fully franked ordinary dividend as
well as upside potential of special dividends in 2015 and
2016. Asset quality continues to improve, providing positive
implications for future earnings growth. Earnings and
dividends are likely to grow around 7% per annum during our
five year forecast period. Forecast profit growth will boost
surplus capital, providing opportunities for active capital
management. Westpac's loan loss to average loans is the
lowest of peers at just 0.12% for first-half fiscal 2014.
Loan impairments at these historic lows are unsustainable,
and we continue to forecast impairments rise to 0.20% in the
medium term. Our cash profit forecast for fiscal 2014
remains at AUD 7.7 billion, as does our AUD 35.00 fair value
estimate. At current prices, the stock is close to fair
value.

Morningstar Recommendation:
HoldTony Sherlock, Morningstar Analyst - The vote to create Scentre Group on
29 May was deferred to 20 June (proxy forms are due 18 June)
because of the release of new and material information; that
is, Westfield Group's announcement that if Westfield Retail
did not approve the proposal, it would pursue the separation
of its Australian operations regardless, leaving Westfield
Retail with a new external manager. Westfield Group advised
it expected to begin the separation process immediately,
with a revised plan to be presented to its securityholders
by first-quarter 2014.

The board of Westfield Retail
stated that the new information strengthens its support for
the proposal as there is unlikely to be another opportunity
to buy Westfield Group's Australian and New Zealand assets
and associated management platform. We see merit to this
argument, but we believe it is overwhelmed by the issue of
having to pay an excessively high price for the management
rights. As such, we retain our original advice, which is
that the proposal being put to a vote involves a transfer of
wealth from Westfield Retail to Westfield Group. On this
basis, we recommend investors vote against the proposal to
create Scentre Group.

The decision by Westfield Group to
spin off its Australian assets even if the Scentre proposal
doesn't proceed presents a risk, but the risk should be low.
This is because the new owner of the management rights would
have interests aligned with Westfield Retail, reflecting
their common ownership of the shopping centres. Further, as
Westfield Retail investors were comfortable owning a
property portfolio without the management and development
rights, there should not be a compulsion to overpay for them
when they become available. The arguments that the creation
of Scentre Group will be earnings accretive is unconvincing,
as this comes from increasing leverage from 22.4% to 37.3%
rather than an improvement in the cash-generating ability of
the assets.

Morningstar Recommendation:
AccumulateTim Mann, Morningstar Analyst - Given a continuation of poor market
conditions in mining services, highlighted by recent profit
warnings from service companies (notably Ausdrill and Austin
Engineering), we have downgraded our earnings estimates for
Fleetwood. This follows on from downgrades to our forecasts
and fair value at Fleetwood's first-half 2014 result. We
have reduced our estimates in 2014 and 2015 by 5% and 7%
respectively. We have also reviewed our longer-term
forecasts and have made cuts to reflect more subdued mining
investment. Our fair value estimate falls to AUD 3.10 from
AUD 3.50.

We maintain our no-moat and very high
uncertainty ratings. Fleetwood's end markets remain very
challenged. Price weakness in bulk commodities, such as coal
and iron ore, has seen resource companies continue to
restrict mining investment and focus on repairing balance
sheets. This thematic looks set to continue into fiscal year
2015 and extend into 2016. According to the Bureau of
Resources and Energy Economics' 2014 report, the combined
value of committed and likely resource projects will decline
by 75% to an estimated AUD 55 billion by 2018. This compares
with a current 48 projects with a value of AUD 229
billion.

The high fixed costs embedded in mining services
providers, coupled with a requirement to maintain high
utilisation levels, is putting pressure on tendering. The
risk of cost overruns and low margins is becoming an
increasing feature for a number of companies. The sector
historically performs well during upswings because of high
earnings leverage, yet struggles during downturns. For
Fleetwood, the mining accommodation sector remains
oversupplied with demand softening, vacancy rates
increasing, and daily room rates trending down. On a
predominantly fixed-cost base, the risk to earnings is to
the downside, in our view.

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